Publishing Questions Raised and Answers Given on the Interpretation of Certain Provisions of the Tax Code and Revenue Regulations Regarding the Final Withholding Tax on Interest Income from Deposits and Deposit Substitutes

October 15, 1986 REVENUE MEMORANDUM CIRCULAR NO. 32-86 SUBJECT : Publishing Questions Raised and Answers Given on the Interpretation of Certain Provisions of the Tax Code and Revenue Regulations Regarding the Final Withholding Tax on Interest Income from Deposits and Deposit Substitutes TO : All Internal Revenue Officers and Others Concerned The following are questions and answers which were discussed in a series of conferences between the BIR Committee on Banks and representatives of the Banker's Association of the Philippines (BAP), the Philippine Association of Finance Companies, Inc. (PAFCI), the Investment Houses Association of the Philippines (IHAP), and the Central Bank of the Philippines. Question 1. What is the rate of the withholding tax on interest earnings from deposits and yield from deposit liabilities? Ans. In general, interest earnings from savings and time deposits and yield from deposit substitutes are subject to 20% final withholding tax. However, reference is made to Revenue Memorandum Circular No. 28-86, which provides for a transitory provision as follows: "c) Transitory Rules . Notwithstanding the general rules above, the specific rules set forth below, shall be applied: acd (1) For deposits, deposit substitutes, and from trust funds and similar arrangements, the yield from which were paid in advance and where the prevailing rate of withholding tax at the time of placement have already been discounted or deducted, no additional withholding tax shall be imposed. (2) For deposits, deposit substitutes, and from trust funds and similar arrangements, the maturities of which fall after August 1, 1986, on which no withstanding tax has been discounted or deducted, the tax shall be applied as follows: a) Interest/yield earned or accrued from October 15, 1984 up to December 31, 1985 subject to 15% withholding tax; cd b) Interest/yield earned or accrued from January 1, 1986 to July 31, 1986 subject to 17.5% final withholding tax; and c) Interest/yield earned or accrued from August 1, 1986 subject to 20% withholding tax." Question 2. Are Rural Banks subject to the final withholding tax on interest earnings from deposits and deposit substitutes? Ans. Notwithstanding the provisions of P.D. No. 2026, which restored the rural banks' exempt status (previously withdrawn by P.D. 1955), the said restoration cannot be considered as to have amended P.D. 1959 which amended the Tax Code by removing all exemptions and preferential tax treatments in the case of the final withholding tax on interest earnings from bank deposits and yield from deposit substitutes. For this reason, rural banks remain subject to the final withholding tax effective October 15, 1984. (See BIR Ruling No. 51 (a) - 159-86). Question 3. Can a tax exempt client who purchased government securities where the appropriate final withholding tax has been withheld claim for a refund? If so, what is the procedure? Ans. Under Revenue Memorandum Order No. 29-85, only NSTA - accredited foundations and the Philippine National Red Cross are allowed refund of taxes withheld, under certain conditions, by virtue of FIRB Resolution Nos. 16-85 and 17-85, respectively. These entities are considered taxable, but may claim for refund of the taxes paid. The claim for refund shall be filed with the Government & Tax Exempt Corporations Division, BIR, for processing and evaluation. All Internal Revenue Officials and Others concerned are hereby enjoined to give this Revenue Memorandum Circular the widest publicity possible. BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue